Legislature(2003 - 2004)
03/22/2004 01:42 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 298
An Act relating to the distribution of appropriations
from the Alaska permanent fund under art. IX, sec.
15(b), Constitution of the State of Alaska, and making
conforming amendments; and providing for an effective
date.
Co-Chair Harris MOVED to ADOPT Work Draft Version V for HB
298 dated 3/19/04. There being NO OBJECTION, it was so
ordered.
MR. PETER ECKLUND, STAFF TO REPRESENTATIVE WILLIAMS,
explained the changes by comparing Version V with the
previous version, House Special Committee on Ways & Means
Version U. In Version U, on page 3, lines 5 and 8, the word
"average" was changed to "annualized," at the request of the
Permanent Fund Corporation. On page 3, line 6, "10 calendar
years" was changed to "10 fiscal years" to match the other
calculations based on fiscal years.
On page 3, line 21, after the word "inflation" the remainder
of that subsection (1) and (2) is deleted after the words
"for a specific fiscal year by," The new language was
inserted in Version V, page 3, lines 20- 26 was a change
requested by the Permanent Fund Corporation.
MR BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA
PERMANENT FUND CORPORATION (PFC), DEPARTMENT OF REVENUE
explained the change in Version V starts on line 24 of page
3. The PFC has recommended a simpler way to calculate the
annual inflation rate, using the Consumer Price Index (CPI).
The Corporation has always used the CPI, and would now look
at the change in one 12-month period instead of from month
to month. It is a technical simplification.
Mr. Ecklund addressed Representative Croft's questions from
the last hearing on the bill, referring to page 3, lines 17-
18 of the Ways & Means Version U. The language states, "50
percent may be appropriated to the general fund" and "50
percent may be appropriated to the dividend fund". The new
Version V states: "not more than 50% may be appropriated to
the general fund" and "not more than 50% may be appropriated
to the dividend fund." He explained it was in response to
questions of whether "may be appropriated," meant that 60%
or 40% could be appropriated. The new language sets more of
an upper cap. The way it is written allows future
legislatures to decide a cap of zero to 50% on either the
general fund or the dividend.
Mr. Ecklund referred to page 3, line 14, Work Draft V
subsection (b), "The legislature may appropriate from the
fund for each fiscal year the amount for costs of the
corporation associated with operating and investing the
fund." The current costs of operating the Fund are between
$45 and $50 million annually. Those operating costs would
be taken off the top, and then 50% would be distributed to
dividends, and 50% to the General Fund.
Mr. Ecklund referred to page 3, line 22, subsection (d)
noting that the previous version was silent on when the
transfer of money would occur from the Permanent Fund to the
dividend fund and the General Fund. The new language states
that the transfer would occur "within 14 days after the
effective date of the appropriation."
Mr. Ecklund referred to a change in Version V on page 4,
Sec. 5, which now states, "The operating budget of the
corporation shall be included in the state's operating
budget under AS 37.07 (Executive Budget Act)." He said the
Corporation is agreeable to the language change.
Representative Chenault asked if the Corporation has any
problem with the change to 14 days.
Mr. Bartholomew commented on the timing of the
distributions. The dividend distribution historically ranges
from a $500 million to $1 billion lump sum distribution
that is needed within the first week of October. It is a
policy call if the money resides in the General Fund or the
Permanent Fund for that period. It has been transferred in
July, so this change is in line with how the Corporation
handled the dividend this year. The new language providing
an allocation for state services would require discussion on
whether to pay a lump sum at the beginning of the fiscal
year, or on a quarterly or monthly basis. He said that when
there is a steady cash flow, it is easier for the Fund to
plan to do a recurring payment rather than a lump sum. A
lump sum requires determining how many securities to sell or
how to raise the cash. However, Mr. Bartholomew said that
the Fund could make it work as written for a $1.2 billion
transfer on that date. He asked the committee to consider
approaching the state services portion from a cash flow
standpoint with either a quarterly or monthly distribution.
He said it would work as written.
In response to a question by Co-Chair Harris, Mr. Ecklund
explained that language was removed from Section 10 of the
previous Version U, and confirmed it now provides one
effective date of January 1, 2005 if voters approve the
constitutional amendment.
Co-Chair Harris MOVED to amend Amendment #1 by adding the
words "not more than" before (1) and (2) to incorporate the
change in Version V. Co-Chair Williams OBJECTED.
Co-Chair Harris explained that his Amendment #1 would change
the 50-50 allocations to the General Fund to not more than a
40% appropriation to public education, and not more than a
60% appropriation to the dividend. He said that his
reasoning is to ensure that the public would accept the
measure, and would understand that the Legislature wouldn't
take any more of the dividend money than is necessary for
the operation of the public education portion of general
government. He remarked that education is the most highly
supported service by the public. He submitted the amendment
hoping that it would help to pass the bill and the
constitutional amendment.
The amendment to Amendment #1 reads:
Page 3, lines 19-20:
Delete all material and insert:
"(1) not more than 40 percent may be appropriated for
public education;
(2) not more than 60 percent may be appropriated to
the dividend fund"
Vice-Chair Meyer commented that the 60-40 split is closer to
what the "Conference of 55" had recommended. He agreed that
40% is appropriate for public education, but expressed
concern that 50% could also be appropriated for education in
the 50-50 split. He thought that 50% would get the
Legislature closer to the amount needed for education. He
thought the discussion would center on the 40-60 split or
50-50 split. He indicated that he's inclined to leave it at
50-50 but would agree to change public education to 50% in
(1) of Amendment #1.
Representative Hawker agreed with Vice-Chair Meyer's
thinking. He drew attention to the new fiscal note from the
Department of Revenue, dated 3/22/04 at 12:30 pm. The
analysis gives current projections of appropriations
available to the Legislature's discretion under the adoption
of the 5% POMV in a constitutional amendment. He noted that
in FY 2006, the 50-50 split breaks out Public Services and
Per Capita Dividend at $641 million each. It climbs to
about $800 million each in FY 2011. Combining the two
figures totals about $1.2 billion in FY 06 and $1.6 billion
in FY 11. Looking at immediate need, the proposed amendment
would increase the amount appropriated by 10% from 50% to
60% for an approximate additional $120 million into
dividends and away from public services, and perhaps
education.
Representative Hawker discussed the attempt to increase
education funding by about $90 million a year for all future
years, asking where it will come from. He doubted that the
current $30 per barrel oil price would be sustained. As that
price declines, he said the state would have to "scratch" to
meet the recurring budget requirements. He voiced reluctance
to designate that extra 10% or $120 million to dividends
when it is needed for schools. He noted that the schools
need an additional $30 million to $40 million above the $90
million each year. He calculated that $120 million in a per
capita dividend for 600,000 residents has a net effect of
$200 each. He noted that public testimony this year
predominantly asked the Legislature to pay for schools first
and expressed support for using some of the state wealth for
state programs. He was not inclined to support the
amendment.
Representative Croft spoke against Amendment #1 for
different reasons. He said that it would amend a statute,
and it doesn't matter what those two sections are because
they give a false perception to the public as long as the
words "may be appropriated" are used. It's a statement that
these percentages could be used for public education or
dividends or for anything, and different numbers could also
be used. The language doesn't put any substantive
restrictions on what the Legislature can and cannot do.
Different percentages wouldn't guarantee the result, or
restrict the power of appropriation. He doubted that the
amendment makes the difference the sponsor intended, and
said that it gives a false impression.
Co-Chair Williams asked how the change from 50% to 40% for
state services, amounting to about a $200 million reduction,
would affect the cash flow for payout.
CHERYL FRASCA, DIRECTOR, DIVISION OF MANAGEMENT & BUDGET,
OFFICE OF THE GOVERNOR replied that she perceived the issue
to be the amount of shortfall over the next 5 to 6 years.
She said if the assumption is flat spending, it averages
between $700 and $800 million in each of the next 5 or 6
fiscal years based on the fall forecast. The pending
increase in K-12 funding raises it by another $85 million.
She said that 50% helps a lot in filling the gap, and 40%
helps "not quite as much."
Co-Chair Harris agreed with Ms. Frasca if the intention is
to fill the gap only with Permanent Fund earnings. He
argued that 40% plus other revenues from the gas line or an
income tax would achieve the goal. The budget could easily
be balanced on 100% of the earnings of the Fund. Ms. Frasca
responded that is correct but she said that she "based it on
what has been passed so far."
Co-Chair Williams agreed with Representative Croft that the
split can be "dressed," but he observed that spending on
education is a selling point for the public. He expressed
that the state can't afford a "wish list" of a gas line, an
income tax or high oil prices with a fiscal gap of $600-700
million a year. He said, the Permanent Fund is a rainy day
fund, and "It's raining out there, and I don't want to get
wet." He spoke for taking care of state services, and said
that he strongly opposed the amendment.
Co-Chair Harris questioned adding "shall" rather than "may"
and asked if it would cause a legal problem.
MS. TAMARA COOK, DIRECTOR, LEGISLATIVE LEGAL AND RESEARCH
SERVICES, explained that fundamentally it wouldn't matter in
the context of the two provisions. The lead-in language is
mandatory, which states "appropriations for a specific
fiscal year are limited as follows." With the insertion of
the language, "not more than," some discretion is built in,
whether "shall" or "may" is used. The language says the
Legislature can go up to a certain percentage for a certain
purpose. In any case, statutorily the Legislature cannot
dedicate revenue. Ms. Cook said, from that point of view, it
may be that this provision would not be enforceable,
depending on the form of the constitutional amendment when
it's adopted. She hastened to remind the committee that the
current allocation in AS 37.13.145 repealed in this bill is
also not enforceable as a dedication. She expressed that it
has been very potent in explaining the behavior of the
Legislature with respect to the use of Permanent Fund
income. To that extent, she concluded, there is no reason to
suspect that the new provision 143 [Sec. 37.13.143] would
have less political force.
Co-Chair Williams asked for clarification that currently the
Legislature may use the Permanent Fund in any way it wishes.
Ms. Cook affirmed, saying that the Legislature is restricted
to the use of the Fund income, but there is currently no
restriction in the Constitution regarding how that income
can be used. The Legislature statutorily has elected to
distribute it under a formula providing for dividends and
inflation proofing. She said it has mathematically resulted
over the years in an accumulation of additional money in the
earnings reserve account. She noted that that statute also
could not be enforced as a dedication, and it has been
adhered to by the Legislature because of the public policy
decision it makes every year.
Co-Chair Williams asked if the Legislature has ever used any
part of the Permanent Fund earnings for state services. Ms.
Cook thought that once or twice small amounts from the
earnings reserve or income account were used to reimburse
litigation expenditures of the Department of Law when it was
at fault in litigation. She said there might have been other
isolated instances involving very small amounts.
Representative Hawker noted that over the last 8 years since
1996, the Legislature has appropriated over $238 million
from Permanent Fund earnings for other purposes.
Appropriations to the Department of Corrections through
provisions in statute allow taking dividends from felons to
use for the department's operations. Supplemental social
service benefits are paid to recipients who also receive
dividends. The Legislature has also funded administrative
costs of the Departments of Revenue, Public Safety, and Law.
In response to a question by Representative Stoltze,
Representative Hawker affirmed that it is money already
appropriated for dividends that has been redirected.
Ms. Cook agreed that Representative Hawker is correct. She
cited AS 37.13.145, the distribution system that puts a set
formula amount into the dividend fund. She clarified that
in the dividend fund statutes, the Legislature also
identified some appropriations that are taken out of the
dividend fund, not for the distribution, but for the
purposes Representative Hawker has itemized. It is part of
the dividend program.
Co-Chair Harris commented that constitutionally, 25% of oil
royalties go into the Permanent Fund automatically, so it
was felt that 25% or more can toward the operations of oil
and gas to help perpetuate and build up the Fund.
Co-Chair Williams noted that the Legislature hasn't used the
Permanent Fund earnings since enactment. Ms. Cook agreed
that it is fundamentally true. As the earnings have
accumulated, the Legislature has swept the additional
earnings back into the principal of the Permanent Fund
through a special act of appropriation.
Co-Chair Williams commented that if this measure passed
right now, it would be difficult to change the numbers up or
down. He recommended that the Legislature can always pay
more to the dividend distribution, but it can't lower the
dividend amount.
A roll call vote was taken on the motion to adopt the
amendment to Amendment #1.
IN FAVOR: Chenault, Foster, Harris
OPPOSED: Stoltze, Croft, Fate, Hawker, Joule, Meyer, Moses,
Williams
The MOTION FAILED (3-8). Amendment #1 was not adopted.
Vice-Chair Meyer agreed with Co-Chair Harris in dedicating
money to education in statute. He proposed a conceptual
Amendment #2 using the 50-50 split that would state, "50%
may be appropriated for public education."
Amendment #2 reads:
Page 3, line 19:
(1) not more than 50 percent may be appropriated for
public education;
Amendment #2 was adopted without objection.
HB 298 was heard and HELD in Committee for further
consideration.
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